China’s Sino Iron mine in Australia just got $2 billon more expensive

The cost of building China's CITIC Pacific’s first iron ore mine in Australia, Beijing’s largest investment in the Aussie mining sector, has increased to a shocking $8 billion, according to The Australian.

The new estimated budget is at least three times higher than the original $2.5 billion cost originally announced in 2006, but CITIC Pacific’s CEO, Hua Dongyi, told the paper that the mine is on schedule to start production in September.

So far Sino Iron project, poised to become the biggest magnetite mine in the world, has sucked up more than $7 billion and predictions are that the mine, already two years behind schedule, could end up costing more than $10 billion to complete:

“This is no longer about commercial goals,” says a senior executive at one leading Asian trading company with extensive sourcing operations in Australia. “It is about Chinese machismo. They have plonked down too much money to pull out now.”

Overspending and project delays are not uncommon to several Hong-Kong listed mining firms, which shows that the world’s second-biggest economy might not be as well prepared for global expansion, as many thought.

Sinosteel, for instance, is another Chinese company that recently suspended work on its $2 billion Weld Range iron ore mining project in Australia's Midwest region. The company quoted delays in port development and lack of rail infrastructure as the main reasons.

China imports close to 60% of its iron ore, so the Sino Iron project is considered a major attempt to stop the trend and supply the internal demand with local providers.

Iron ore prices have found good support at $130 a tonne this year – below that many domestic Chinese iron ore miners and high-cost producers elsewhere become unprofitable – recovering from a mini crash in October last year that saw the commodity touch a low of $116 a few weeks after hitting all-time record highs above $180.

The steelmaking raw material will average $136 a tonne in 2012, the Bureau of Resources and Energy Economics of Australia forecast in June. Benchmark Tianjin 62% ore averaged a record $168 during 2011.